Debt-to-Income Ratio Calculator
Lenders will take several financial indicators into account when issuing your approval on a loan. One of the measurements used to indicate your financial standing is your debt-to-income (DTI) ratio. Knowing this figure will help you establish a ground 0 to help you determine how much house you can afford before you begin shopping on the market.
For eligible military service members, a portion of your loan is backed by the Department of Veterans Affairs through the VA program. This means that your DTI ratio may not fall under the same scrutiny as borrowers who choose a conventional loan option. Let’s dive into how your DTI is calculated and what percentage you should be aiming for when applying for a loan.
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Can I Qualify for a Loan with my Current DTI?
First, it is important to understand how your DTI is calculated and what it reveals about you to your lender. Your DTI gives VA lenders an insight into your purchasing power and your ability to repay your debt by comparing your gross monthly income to your major monthly debts. A higher DTI score means that you have more debts eating into your gross monthly income, whereas a lower DTI score means that you have more gross monthly income available. This matters to your lender because more available funding means there is less risk in issuing you a loan, as you are less likely to default on it.
Conventional loans usually look at the front end and back end of your DTI. However, with a VA loan, your lender will focus on your back-end ratio, which provides a more holistic view of all of your major monthly expenses. Those who are seeking a VA loan should aim to have a DTI of 41% or less.
The VA itself does not mandate a specific DTI ratio; this figure comes from the lender. Veterans and active-duty service members whose DTI does not fall under this ratio may undergo additional financial scrutiny to assess the amount of risk associated with issuing your loan. Your credit score and other financial statements will be taken into account to determine your loan-worthiness.
What Inputs Are Needed to Calculate Your Debt-to-Income Ratio?
Your DTI ratio is a simple comparison that divides outstanding major debts you pay off each month by your gross monthly income. To the best of your ability, fill in the inputs below with informed figures to get a more accurate DTI ratio.
- Gross Monthly Income. Your gross monthly income is defined as steady income earned from some form of employment — with a company or self-employed. Irregular sources of income, like gifts or GI housing bill allowances, are not considered by your lender as they do not offer financial reliability as a source of income. However, your lender will consider dividends, capital gains, business income, and retirement distributions as sources of income.
- Revolving and Installment Debts. This can include things like credit card debt, student loans, auto loans, or any other outstanding debt that requires recurring monthly payments. Child-care costs and alimony won’t show up on your credit report, but they will also be considered for your DTI evaluation. Fill in how much you pay towards these debts each month — not just the minimum amount — to compare what you contribute towards paying your debts each month to your gross monthly income.
What Happens if my DTI Score is Higher than 41%?
Your DTI ratio has a significant impact on your lender’s decision to issue a loan. Having too high of a DTI ratio can make the pathway to homeownership a more arduous process. For some, this will mean having to wait or hold off on buying a home until you have a better balance of debts and income or a lower DTI ratio. For others, a possible solution may be to seek a lower loan amount, which will affect your buying power for how much house you can afford. The latter option may not be as big of an issue for purchasing power with a VA loan since no down payment is required.
How Can I Lower My DTI Ratio?
There are no tricks or gimmicks when it comes to lowering your DTI ratio. You can either lower your monthly recurring debt, or you can increase your gross monthly income. In other words, you can pay off more of your outstanding debts or generate more income. You may try a combination of these two methods to reach a breakeven point resulting in a DTI ratio your lender will accept. Although this course of action may require you to make some tough financial decisions, securing a low enough DTI is an imperative part of the home buying process. Using a DTI calculator will give you a realistic outlook on what you can afford based on your current financial situation and what you should work towards to get into your dream home.
How Can Hero Loan Help?
At Hero Loan, it is our mission to help our qualified veterans and military service members land their dream homes by securing the best deal possible on a loan. Our team of friendly lending experts provides a customer-centric experience designed to address each individual homebuyer’s budgeting needs.
We are grateful for the invaluable services our vets and active-duty service members have dedicated to our collective betterment. That is why we support local-owned veteran businesses and local events to show our appreciation. We also support the Fisher House Project, which provides military family members with complimentary housing while their loved ones undergo a medical procedure.
Call us today at 800-991-6494. We will be happy to assist you to come up with a financial plan of action that will get you into your dream home. Our underwriting process is efficient and relatively painless, with closing times in as little as two weeks. We are also available via our online application to discuss how much home you can afford according to your current DTI ratio.